Two months ago, in February 2021, a friend had narrowed down on a life insurance plan after a lot of analysis. He filled the proposal form and was ready to make the payment. Just then, the plan was withdrawn for repricing by the insurer. The representatives of the insurer were as surprised as we were frustrated.
This is just symptomatic of the confusion that currently prevails around life insurance products especially the protection plans. A few insurers have stopped underwriting fresh proposals for some of their protection plans. Many are increasing their prices. Almost all have started asking more questions during their underwriting process.
I spoke to a few senior industry executives to figure out the context behind this. It turns out that insurers are struggling with the uncertainty caused by Covid. The existing pricing models do not factor in the increased mortality due to Covid. Further, this mortality has two parts. The relatively more obvious is the ‘direct’ deaths, which occurs before the person has fully recovered from the infection. The second part and the more difficult to model is the ‘indirect’ deaths, which occurs a few months after the person has recovered from the infection. Of the reported death claims, insurers are seeing a number of them with past history of the infection.
A layman conjecture is that a weakened immune system after recovery may succumb to another illness, more so if it occurs in quick succession. Unfortunately, insurers do not have enough data to model this scenario. By now, they have some information about direct deaths by age group. However, the data on indirect death is patchy at best.
Insurers suggest that the overall impact on pricing is more than 20% based on direct deaths. The infection incidence varies substantially by geography, and the death rate varies by age group. So, the actual pricing impact for specific groups will be a wide range. Such increase may lead to customer drop-outs. That’s why the insurers have to be pragmatic about the share of cost increase they want to pass onto the customers without shrinking the overall demand substantially.
The impact on policyholders is fewer choices, some confusion and higher premiums. Organizations with open group life cover such as associations or clubs, who want to give an option for its members to enroll in the plan are left with limited options to choose from. Insurers are staying away from such risks, as the chances of adverse risk selection is very high.
Next, policyholders are unsure about the impact of covid declaration on claim. Several insurers now take a self-declaration, which asks them if they or their close family members have recently experienced any Covid related symptoms. Many prospective policyholders may be asymptomatic but infected. If a claim arises in the near term, it will be difficult for either party to establish if the declaration was deliberately misleading. Also, given the short cycle time of the illness, it could be difficult to establish if the infection was present prior to the policy inception or contracted later.
Another affected segment has been employers, who provide Group Term Life to their employees. There has been a substantial increase in premium here, even if a group hasn’t reported any claim. Additionally, insurers have started putting a waiting period of around two months for a covid recovered individual to join the policy.
The silver lining here is that a few insurers have not substantially revised their underwriting guidelines or pricing for individual life insurance products. For those buyers, who have been sitting on the fence to enhance their coverage or get a new cover, this is a good time to act. Also, for existing individual policyholders the ongoing volatility or future changes will have no impact on their policy. Since individual life insurance policy is a long-term contract, the terms remain unchanged for the duration of the policy. To the credit of my friend, he did not get held up because of the last-minute change with one insurer. He was quick to select the next best plan to get himself covered. As the country deals with yet another wave of covid cases, future uncertainty is likely to be higher. Even though premiums are increasing, one should buy term insurance and be secure now.